Hong Kong: Interest income of property developer not eligible for profits tax exemption for bank interest income

Board of Review decision

Interest income of property developer not eligible

The Board of Review held (Case No. D12/22) that sums received by a property developer, representing interest income on amounts placed in stakeholder accounts in respect of pre-sale of uncompleted residential units, did not qualify for the profits tax exemption for bank interest income.


The taxpayer, a property developer, pre-sold uncompleted units in a residential development project and received deposits and part payments of the purchase prices from purchasers. The pre-sale was governed by a standard form of agreement for sale and purchase approved by the Hong Kong government. Under the agreement, (1) a purchaser had to pay the deposits to the solicitors’ firm engaged by the taxpayer as stakeholder, (2) the solicitors’ firm undertook to hold the monies received as stakeholder and was required to place the monies into interest-bearing bank accounts in Hong Kong and (3) the taxpayer was entitled to all interest earned on such accounts. The monies kept in the stakeholder accounts would only be applied and released according to the terms and conditions stipulated in the agreement.

The taxpayer treated the amounts it received in respect of the interest earned on the accounts as tax-exempt bank interest income under the Exemption from Profits Tax (Interest Income) Order in its 2015/16, 2016/17 and 2017/18 profits tax filings. The Inland Revenue Department (IRD) disagreed on such treatment and issued tax assessments that included the interest income as the taxpayer’s assessable profits. The taxpayer lodged an objection against the tax assessments which was unsuccessful and then an appeal to the Board.

The Board found that the exemption order, which is intended to encourage taxpayers to repatriate offshore deposits to Hong Kong, did not apply to the taxpayer’s interest income because the purchaser’s deposits were required to be placed in bank accounts in Hong Kong under the government’s standard sale and purchase agreement. In addition, the Board found that the sums received under the agreements in respect to interest earned on the accounts did not constitute “interest” because it was not earned directly, but rather received by virtue of the agreements. The Board further found that the solicitors’ firm was not an agent or trustee of the taxpayer. Finally, the Board concluded that although the taxpayer was the ultimate recipient and beneficiary of the interest earned on the accounts, the arrangements under the agreements was for the benefit and protection of the purchasers, not the taxpayer.

KPMG observation

It has yet to be confirmed whether the taxpayer in this case has lodged an appeal against the Board’s decision to a higher court, and whether other taxpayers in the real estate industry that have a similar dispute with the IRD will bring the issue to court.

The Board did not explicitly mention in its decision which party/parties is/are the legal owner(s) of the deposits and the interest income during the period in which the amounts were held in the stakeholder accounts, and whether the solicitors’ firm was entitled to a profits tax exemption on the bank interest income derived from the stakeholder accounts. It is worth noting that in CIR v Messrs. Lau, Wong & Chan Solicitors, the court held that the clients’ monies held in a trust / escrow account by the solicitors’ firm belonged to the clients and not the solicitors’ firm, and the interest earned from the account would also belong to the clients if there was not a specific agreement between the solicitors’ firm and the clients for the former to keep the interest. The IRD refers to this case in Departmental Interpretation and Practice Note No. 34 on the Exemption Order and takes the position that interest income derived from solicitors’ clients’ money does not fall within the scope of the Exemption Order because clients’ money is not funds of the solicitors’ profession.

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com



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